Question

When the price of a capital good increases, what happens to the prices of related consumer goods and services? Why?

Answer 1

The correct answer is that the consumer goods increase in price too. A capital good would be something like flour and the consumer good would be something like bread. If the price of flour jumps up, so does the price of bread. Governments sometime regulate this to protect the citizen by putting a limit so the price doesn't grow, but it pays for the rest to the baker.